Recap 2015-01-09: My Assessment


The hourly earnings figure was the data point (to 1.7% YoY vs a revised 1.9% last month) that was the talk of the day until oil leaked lower. Most of the commentary I saw focused on the surprising drop, but what’s important is the real earnings growth, not nominal. We won’t see the CPI figure for another week, but consensus forecasts right now are for a 60bp drop to 0.7% YoY vs 1.3% last month. This means that real weekly earnings likely grew faster.


In any case, this is a goldilocks environment, folks! The evidence is abundant:

  • Stronger real earnings growth,
  • low inflation, (likely to be below -0.5% YoY before the end of Q1)
  • low real interest rates (obviously at the lowest level in over a generation)
  • low systemic leverage. (private sector debt payments as a percentage of income is even lower than the mid 90’s trough)

As I’ve mentioned before, the last such episode was the mid to late 90’s, but without risks from EM currency pegs. The backdrop is basically ideal for a bubble in long duration USD financial assets.

I’m not just talking about the S&P here (which remains cheapish to macro factors, IMO) – I’m also talking about long term treasuries. As many people have noted, longer term treasury yields have broadly decoupled from the data in the past 6 months, ostensibly due to the drop in oil. The chart below shows the Bloomberg US economic surprise index in blue and the 3m change in 10yr treasury yields in red. As you can see, these two series broadly tracked each other until mid June:


But there is another factor that is likely at play here – the widely expected ECB QE program. The fact that the spread between 10yr treasury yields and 10yr German Bund yields have been basically unchanged since early September suggests that the European bond market has likely had a large effect on the US Treasury market in the past quarter:


This is particularly relevant and timely now, because the ECB is expected to announce QE in 2 weeks. And as we know, markets are expectations discounting mechanisms. If history is any guide, this suggests that the European bond market may act like the US bond market around Fed QE announcements: rally into the event, (i.e. discount it) and then sell off after.

The fact of the matter is, given more QE and given the drop in oil (and hence inflation breakevens) a lot is already discounted at these yields. Another way to look at that is that a combination of an announcement of an ECB QE program along with a possible bounce in oil (futures prices have been stable for a few days and the strip is pricing in a ~15% move up to ~$55 by year end) may well be a trigger for a recoupling of US bond yields to the economic data.

Note that such a scenario is likely to be bullish EURUSD, at least in the near term. Reasons:

  • Much has already been made of how the currency cross has tracked real rate differentials over the past decade. But note that
  • nominal yield differentials have stopped widening for a few months now (e.g. see chart above) around long term extremes.
  • Real yield differentials have actually tightened (i.e. suggesting a stronger EUR)
  • Despite the US Shale revolution, the US continues to be a petroleum importer, and EURUSD continues to be correlated to oil due to the effect on the trade balance:
  • image009
  • Long USD vs EUR is just so consensus
  • Speculative positioning reflects that
  • EURUSD is at a very long term support/resistance level:
  • The price action looks capitulative. It’s hard to tell in the chart above, but the entire body of this month’s candle stick is below the lower Bollinger band.

2 weeks is a long time in financial markets, and current trends are strong, so there is a higher probability that I’m early on some of this. But, forewarned is forearmed!


  • US Employment:
  1. Payrolls improved to 252k vs 240k exp, with revisions adding 50k.
  2. Unemployment declined to 5.6% vs 5.7% exp and 5.8% prev, as the participation rate declined to 62.7 vs 62.8 prev
  3. Hourly Earnings was the biggest surprise, falling to 2.7% vs 2.2% exp and 2.1% prev

Canada Employment

  1. Net employment declined -4.3k vs +15k exp and -10.7k prev. Full time employment was more than offset by a decline in part time employment
  2. UER was stable at 6.6% as exp, as the participation rate declined to 65.9 vs 66 exp and prev
  • China CPI rose to 1.5% as exp vs 1.4% prev
  • Bloomberg reported that the ECB staff has presented policymakers with a plan for purchase of as much as €500bn of “investment-grade” assets focused on government debt
  • The WSJ notes how auto credit quality has deteriorated. More than 2.6% of auto-loan borrowers who took out loans in Q1:13 had missed at least one payment by Nov, the highest level since ’08
  • Margin requirements for Treasury futures were increased at the CME
  • Some of the world’s biggest oil trading firms are starting to book super-tankers to store oil at sea for the next 12 months in anticipation of a price rebound.
  • Apache mid-day Thurs made a comment about how PermianBasin production may be economic at $50 crude thanks to new technology and lower costs.


  • Mon: Japan Eco Watchers Survey, China Trade Bal
  • Tue: UKCPI, US NFIB Survey
  • Wed: French CPI, US Retail Sales, Oil Inventories, Japan Machine Orders, UK RICS House Prices, AU Employment
  • Thu: US Empire Manufacturing, Core PPI, US Jobless Claims, Philly Fed

2 thoughts on “Recap 2015-01-09: My Assessment

  1. Today’s data reinforce my view that CPI will print lower and lower and that the Fed won’t raise rates in 2015. I stick with Gundlach’s view: 10 yrs Treasury at 1.35 and 30 yrs Treasury at 2.00.

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